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Is Europe Picking on Google?

Both Google and Facebook are facing surprising challenges overseas -- join us to learn more.

Is Google(NASDAQ:GOOG)(NASDAQ:GOOGL) in trouble with the European Union? The European Commission has released a Statement of Objections outlining its antitrust complaints against the tech giant. Will Google be on the hook for billions in fines? Dylan Lewis looks at a previous run-in between Microsoft(NASDAQ:MSFT) and the EC for an idea of how things could play out.

Then we look at challenges to a Facebook-led (NASDAQ:FB) initiative to bring Internet access to the 2/3 of the world's population that isn't yet online. Free Internet for poor populations doesn't sound controversial on its face, but the initiative has raised concerns over net neutrality. Tune in to hear both sides of the story.

A full transcript follows the video.

Sean O'Reilly: The European Union needs Google's money to help them bail out Greece, on this tech edition of Industry Focus.

[INTRO]

Greetings Fools, I am Sean O'Reilly, joined by the incomparable Dylan Lewis, joining you from Fool Headquarters in Alexandria, Virginia. How are you doing today, Dylan?

Dylan Lewis: Doing all right. Nice little Friday here in Alexandria.

O'Reilly: TGIF! And it's sunny, 70°. Good times.

Lewis: What are we doing here in the studio?

O'Reilly: I don't know, because there are no windows. We should totally walk to Five Guys for lunch, though.

Lewis: Oh, good Five Guys.

O'Reilly: Good times. First up we are talking about, the European Union is lobbing some antitrust concerns at Google.

Lewis: Yes, they released a Statement of Objections. It's been a five-year inquiry into Google. Their statement was "Google gives systematic favorable treatment to its comparison shopping products in its general search result pages by showing Google Shopping more prominently onscreen."

O'Reilly: I don't do a ton of shopping on Google. Why is this their concern?

Lewis: Right? You'd think maybe their 92% search market share, at Google, would be something a little bit more concerning.

O'Reilly: Their actual bread and butter, they do legally, apparently.

Lewis: Yes.

O'Reilly: Fantastic.

Lewis: It's more of the add-on search value that they provide. But the counterargument there is that they're adding value. They're providing tack-on things that people are searching for anyway, and they're helping people reach those pages faster.

O'Reilly: How does this compare to how Google operates in the United States, with the market share and everything?

Lewis: I think they have slightly stronger market share in Europe than they do here in the U.S., but ...

O'Reilly: It's comparable.

Lewis: Yes. I think it's more just the EU just going after them.

O'Reilly: I jokingly said in the intro ... I don't know if they're hurting for money, or why they're doing this. How much money do they want?

Lewis: They're going after $6.4 billion. Just for some context, that's roughly 1/10 of Google's annual revenue in 2014.

O'Reilly: That's not a lot.

Lewis: Especially when you consider this is going to be a multi-year thing. A historical example; the EU, or EC, went after Microsoft starting in 2004 and I think that wasn't settled until 2012-2013.

O'Reilly: This is going to be a while, obviously.

Lewis: Yes, it's going to be a long process. If you want to look at the revenue driving aspect of the region for Google ...

They don't do the breakouts by region the way that we'd like for our purposes on the show right now. They do U.S. and International. It's not an apples-to-apples comparison, but what we can do is use Facebook as a proxy for Google.

They have a similar amount, 45-47% of their revenue coming from the U.S.

O'Reilly: (unclear)

Lewis: Yes. With Facebook, they get about 25-27% of revenue coming from Europe. If we apply that to Google -- ads are coming in kind of the same way, it's a similarly lucrative population.

O'Reilly: I'm really surprised that Europe is going after the shopping aspect of Google, because when they went after Microsoft -- and we'll talk about them in a second, Microsoft's fun relationship with the European Union -- it was all operating systems in Europe that were Microsoft-run. They were doing stuff with Internet Explorer and everything.

It seems so small. I don't know why they're nit-picking here.

Lewis: When you look at the revenue side, Google pulls in about $17 billion from Europe, based on the comparison I drew up with Facebook before. It's not an insignificant amount of money, but it's odd to see them going after them.

One of the notes I read was that the shopping could just be the beginning. We could be looking at Google Flights, Google Travel ...

O'Reilly: I just have one question. Do all the European government employees use Google? If so, this is slightly hypocritical, but OK.

Lewis: It's funny. Even here at the Fool, we use Google for everything.

O'Reilly: When I first heard about this, I of course saw the headline and like anybody else I didn't know that it was about the shopping. I was like, "Wait, wait, wait. You're mad at them for making a better algorithm? What's the issue here?"

Lewis: Yes, it's hard to punish someone for doing their job well.

O'Reilly: Yes, doing it better than everybody else. That's what you want them to do!

How does this compare to what happened with Microsoft, and the money there? You mentioned it was dragged out, and that was fun. Did Microsoft just ignore them, basically?

Lewis: What happened was, I think in 2004 EC/EU started going after them. They said that Microsoft needed to disclose complete and accurate interface documentation, which would allow non-Microsoft workgroup servers to achieve full interoperability with Windows PC and servers. It's a compatibility issue. It's allowing people onto your servers and having full functionality.

The interesting thing about this was, the headline number that most people attach to is $1.5-2 billion fine. The reality is the original fine that was stated was $600 million.

O'Reilly: Wow.

Lewis: The total ballooned to two to three times that because of non-compliance by Microsoft.

O'Reilly: Microsoft paid three times more than they had to because they were just lazy, or didn't care?

Lewis: Because they fought it.

O'Reilly: That's hilarious.

Lewis: Or felt that they were providing enough information for non-Microsoft workgroup servers, that the EC thought they weren't.

I don't know if there's a perfect parallel there.

O'Reilly: No. It sounds very different because Google is a search engine and Microsoft is a software company.

Bring it back around to Google. How does this compare with their ever-popular Android operating system?

Lewis: It's interesting, because Android might be on the table too.

O'Reilly: That could actually be a problem!

Lewis: Yes.

O'Reilly: Because people are shopping on their phones? Or what?

Lewis: Google has about 92% search engine market share in Europe. They have about 70% mobile operating system market share.

O'Reilly: How do you say "Google" in French, I wonder?

Lewis:Le Googel.

O'Reilly:Le Googel!

Lewis: I think if you add an accent to pretty much anything ...

With Android, it's kind of nuanced because there's the Android Open Source Project, which allows developers to use the open source platform that they've set up. It's free and allows for modification. Amazon(NASDAQ:AMZN)has done that with their Fire Phones.

O'Reilly: All 50,000 of them!

Lewis: Yes! In that situation, the Google Suite isn't attached, necessarily. You can build out your own ecosystem, which is what Amazon did.

Then there's Google Android, which is totally different and it has all of the added Google services and apps. Most of Google's hardware partners -- Samsung, Motorola, HTC -- go with this version of Android and all the things that come with it.

When they enter an agreement they're getting this suite of products, and that's where the issue with Android comes in, and some of the issues that EC is pointing to.

O'Reilly: It theoretically could be a lot more money, because there are a lot of Android phones in Europe, I have to assume.

Lewis: Yes.

O'Reilly: That's fun! Okay.

Lewis: It's something interesting to watch. This isn't going to be something that's resolved any time soon.

O'Reilly: No. We'll be in the 2020s before Google writes a big check.

Lewis: Yes. Re/code got hold of the internal memo that Google sent out to employees.

O'Reilly: Was there anything salacious in it?

Lewis: Nothing overly salacious, but they made it clear, "We're going to fight this." They did a breakout, and if you go to Re/code you can see it. They looked at shopping sites in the major countries in Europe and showed unique visitors, and Google Shopping trailed quite a bit Amazon, eBay (NASDAQ:EBAY), most of these.

They're admittedly scatterbrain graphs that they showed; there are like 20 different data points on them that they're tracking, so it's hard to make sense of them.

O'Reilly: This goes back around to ... I'm pretty darn sure that Sergey Brin or somebody has said that Amazon was what Google considered their competitor for search, because when you search for a product -- when I go to search for a product -- I go to Amazon to see how much it costs, and Google wants that. It's not like they have this shopping monopoly or anything.

Lewis: Yes. It will be interesting to see how this plays out. I think the big thing to remember is that it's not going to be resolved any time soon. This was simply the beginning of the Statement of Objections process.

Google has the right to respond to all of the allegations, state their case. If history is any example, it's going to drag out over several years.

O'Reilly: I look forward to doing the show where we review the conclusion in the year 2025!

Lewis: Yes. Just another thing that I saw on the Internet; EC looked into iTunes and opened an inquiry.

O'Reilly: This was back at the beginning of the year?

Lewis: A few years ago. They wound up closing the inquiry without any fanfare.

O'Reilly: Nobody has any (unclear).

Lewis: Yes. So, until you see the final sticker on there ...

O'Reilly: This is just the beginning. Yes. Good stuff.

Moving on, boy, U.S. tech companies are having a rough time globally right now.

Lewis: Yes, it's a rough go of it if you're a monolith tech company.

O'Reilly: Or Mark Zuckerberg and his $30 billion.

Obviously Facebook; listeners may or may not know, they are part of the Internet.org initiative, which is trying to bring basic Internet services to the billions of people that essentially live in poverty globally.

We'll get into the details of that in a minute, but they're having a hard time in India, as I understand it.

Lewis: Yes. It's funny how everything boils down to net neutrality these days.

O'Reilly: Just a billion people there ...

Lewis: Do you want to take this one?

O'Reilly: Yes. Long and short, billions of people do not have Internet service globally, and Facebook is teaming up with like seven cell phone companies to bring basic services to everybody, because it doesn't make sense to put in a cable Internet line and modem in rural India.

Lewis: Right.

O'Reilly: The long and short of it, multiple partners in India have actually pulled out, and it basically relates to India's own net neutrality debate that's going on in their country, just like it's happening here, as well.

I didn't know this, but when you start to dig into it, Internet.org brings free Internet to hundreds ... I think Zuckerberg sent out a response, and I'll get into this in a minute -- but he notes that they have brought the Internet to 800 million people in nine countries with free basic Internet services. It's free.

Lewis: Pretty incredible.

O'Reilly: You live on a couple of dollars a day, and you're getting this Internet for the first time. It's a big deal.

Lewis: As I understand it, that Internet comes with a package, though.

O'Reilly: It does. I actually found the list of the 38 sites that Internet.org gives you for free if you happen to be a citizen of India.

It has Wikipedia, IBNLive, of course Facebook-controlled Messenger; Messenger's on there -- now we know why they split it off from Facebook. Reuters Market Light, a very basic financial news service; Times of India, their newspaper; Babajob, a job search site.

It's not the full Internet, and this is why there's this huge debate about it with the net neutrality, because net neutrality says that the Internet should be free to everybody; the entire Internet.

I can kind of see both arguments. I really can.

Lewis: Yes, it's tough. On the one hand, I think we talked about this before; you can't complain that the library doesn't have every book that you want to read.

O'Reilly: It's free.

Lewis: Because it's free! On the other hand, yes. If the Internet is supposed to be free and open, then only having these 38 providers of content ...

O'Reilly: Right. The argument there is, of course, how did you choose these providers?

Lewis: Yes, how is that curated?

O'Reilly: Not somebody else. I think Wikipedia is probably a good start, because it's basically just a giant encyclopedia of mankind.

Mark Zuckerberg of course issued a response, and he noted that they created Internet.org in an effort to connect the whole world by partnering with mobile operators and governments, da da da da da.

He actually noted that he traveled to India recently, and he went to this village, and he actually witnessed in this village a small school where the kids were getting the Internet for the first time.

Remember when you were a kid and you had your crappy Macintosh in elementary school, and you played Oregon Trail? That's what these kids were experiencing.

Lewis: You always wind up dying of dysentery.

O'Reilly: You do, yes. Game over! Of course, the best part is the shooting gallery. But anyway!

He's witnessing these kids in India getting the Internet for the first time. He was like, "Any one of these kids could have a great idea and change the world like Bill Gates or me, or somebody." That's there too. That was his response.

He also noted, and this is kind of in his favor, a lot of the people in Sub-Saharan Africa, India -- these people that are basically working for dollars a day and essentially live in poverty, and the goal is of course to raise them out of it -- they don't fully appreciate the power of the Internet yet.

Bringing them at last these basic services where they can quickly read the news of the day kind of sells them on that, and why they should, as a society, get cable modems into these rural areas.

Lewis: Yes. On the one hand, I totally see the value in the package that they're providing. You have access to pretty much any piece of information via Wikipedia. You have Messenger so you can talk to other people. You have Indian Times so you're up to date on what's going on, the job platform.

There are plenty of things that make sense. I think what people are seeing the danger of here is if you allow an organization to set up an infrastructure in a place with this limited scope of the Internet, that becomes the legacy system.

O'Reilly: They view it as a step back.

Lewis: Yes. It's also a dangerous precedent, because if you wind up in this situation, then 15 years from now nothing's changed ...

O'Reilly: Ends badly.

Lewis: Yes. How much incentive does Zuckerberg have to continue to innovate and allow for more products to be part of that Internet.org suite, once his platform, Facebook Messenger and Whatsapp or something like that, isn't there?

O'Reilly: Right. The other thing of course is that it appears noble, and he is giving this stuff for free, on the one hand. But the other thing is, this is market creation here.

Lewis: Of course, yes.

O'Reilly: "This is 2 billion people that don't have Facebook. This is an atrocity! How do they know what their friends are doing?"

Lewis: Granted, that is the lowest revenue-driving region for them. When you look at Facebook financials, it's U.S., Europe, Asia ...

O'Reilly: A little bit of South America sprinkled in there.

Lewis: I think it's just "Rest of World." I'm pretty sure that's how they categorize it. Internet.org ... I like to think that Zuckerberg's being benevolent, because I don't think there's a ton of money there.

O'Reilly: Yes. You're talking about giving free Internet to people over cell phone towers in rural India. You can't sell these people ads, either, because ...

Lewis: What are they going to buy?

O'Reilly: Right. Not being mean or anything, but it is what it is. Oh, man. Oh well. Thank you for your thoughts, Dylan.

Lewis: Pleasure, Sean.

O'Reilly: TGIF, although I'll see you for lunch.

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For Dylan Lewis, I am Sean O'Reilly. Thanks for listening, and Fool on!

Dylan Lewis has no position in any stocks mentioned. Sean O'Reilly has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, eBay, Facebook, Google (A shares), and Google (C shares). The Motley Fool owns shares of Amazon.com, eBay, Facebook, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.